Lesson 2 of 14 · All lessons in this module
  1. Portfolio expected return and varianceVideo lesson
  2. Portfolio returns over time: drift and rebalancing
  3. The covariance matrix and many-asset portfolios
  4. Correlation and diversification
  5. Scenario-based portfolio risk and the many-asset limit
  6. Integrated cases: three-asset risk from volatilities, correlations and scenarios
  7. Minimum-variance and efficient frontiersVideo lesson
  8. Finding the minimum-variance portfolio and optimising weights
  9. Risk aversion and utilityVideo lesson
  10. Indifference curves and the capital allocation lineVideo lesson
  11. Theory assumptions, risk-aversion measures and the Sharpe ratio of the CAL
  12. Optimal risky portfolio and the optimal investor portfolioVideo lesson
  13. The risk-free asset, the market portfolio and the CMLVideo lesson
  14. Beta, the security market line and the CAPM

This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.

Lesson 2 of 14 · 13 min

Portfolio returns over time: drift and rebalancing

Over several periods a portfolio's return depends on how its weights evolve: left alone, winners grow into bigger weights (portfolio drift), so the realised return differs from the fixed-weight one.

In short

  • Portfolio statistics can be historical (from realised returns) or forward looking (model-based forecasts); history guides forecasts but can mislead.
  • A period's portfolio return is the sum of beginning-of-period weights times the assets' returns over that period.
  • With no rebalancing, a portfolio's cumulative return equals the initial weights times each asset's own cumulative (compounded) return.
  • The arithmetic average of period returns ignores compounding; the geometric average compounds and is never higher.
  • Portfolio drift: weights move as assets out- or underperform. Style drift: the portfolio's character moves away from its strategy. A set rebalancing schedule keeps both in check.

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